This post discusses regulatory risk and the management of regulatory risks.

WHAT IS A REGULATORY RISK?
Regulatory risk is the effect of a change in laws and regulations that could cause losses to a business, sector, or market. Regulatory risk is the risk that a change in laws and regulations will significantly impact an institution. Regulatory risks arise from laws and regulations that rely on penalties or sanctions to regulate the operations of a business. A change in laws or statutes enacted by a governmental or regulatory body can dramatically increase the costs of conducting a business, decrease the attractiveness of an investment, or change the competitive landscape. Regulatory risk is the possibility of changing regulations and laws affecting an industry or a business.

IMPORTANCE OF REGULATORY RISK
A regulator is responsible for enforcing the code of conduct and principles set out in the relevant regulation. If organisations do not conform to the required standards, regulators may issue enforcement action. Enforcement can include financial penalties, withdrawal of licence and imprisonment. Changes in regulations can make significant changes in the industry framework and changes in the cost structure. For example, regulatory risks arising from climate change concerns include (1) more vigorous disclosure requirements regarding a manufacturer’s emissions and (2) the emergence of minimum performance standards tied to energy consumption and greenhouse gas emission controls.

Business organisations should manage regulatory risk effectively as it could result in the following:
1. Increase the costs of running a business – e.g. costs to achieve compliance.
2. Change the competitive landscape – e.g. perhaps invalidating a firm’s business model.
3. Make business practices illegal – e.g. new law changing rules on marketing. and
4. Reduce the attractiveness of an investment.

THE DIFFERENCE BETWEEN REGULATORY AND COMPLIANCE RISKS
Compliance risk is associated with failing to meet regulatory or statutory compliance with policies or rules set by government or industry/sector regulators. Regulations are rules made by an authority or granted to a power to control an industry, process or sector. Regulatory risk is the possibility of changing laws and regulations impacting a business organisation. Compliance is the outcome of adhering to a rule. Compliance risk captures the legal and financial penalties for failing to act under internal and external regulations and legislature.

BUSINESS REGULATORY RISK EXPOSURES
Businesses are susceptible to numerous regulatory risks, including data protection and privacy, senior manager accountability, financial crimes, cyber resilience, fintech, vulnerable customers, conduct and culture, political uncertainty, and benchmarks.

REGULATORY RISK MANAGEMENT PROCESS
Larger organisations need help navigating compliance regulations. They often hire compliance officers and consultants to determine the appropriate risk profile or establish an in-house compliance department to achieve and maintain regulatory compliance.

Here are five essential steps of a regulatory risk management process:
1. Identify activities and services.
2. Identify regulators and regulatory requirements.
3. Assess risks of non-compliance.
4. Evidence compliance. and
5. Monitor and review the regulatory risk management framework.

INCREASING REGULATORY RISK DUE TO REGULATORY CHANGES
Governmental and regulatory bodies often enact new regulations or update old ones. Regulations can increase operations costs, introduce legal and administrative hurdles, and sometimes even restrict a company from doing business. Regulatory changes affecting companies or industries include tariffs and trade policies, tax policy reform, minimum wage laws, and mandated vacation and sick days.

INTEGRATED COMPLIANCE MANAGEMENT FRAMEWORK
Organisations need to adopt an integrated approach to compliance management to mitigate regulatory risk efficiently. But how?

There is no one-size-fits-all approach to compliance. It depends on each organisation’s specific requirements, which depend upon several factors, including the industry, the number of regulations it must comply with, the maturity of the compliance programme, and the jurisdiction.

Core elements of a sound compliance risk management framework include obligatory rule mapping, regulatory change management, compliance risk assessment, compliance control assessments, policy and document management, case and incident management, compliance advisory, and regulatory engagement management.

WHAT IS REGULATORY COMPLIANCE?
Regulatory compliance is mandatory for countries with a robust business and economic landscape for specific sectors and organisations. Regulatory compliance is when companies follow relevant state, federal and international laws and regulations in their operations. Compliance requirements vary depending on the industry and type of business. Regulatory compliance is essential in industries with sound compliance oversight, such as financial services and healthcare, and sectors where data protection, cybersecurity, and consumer privacy are critical to business continuity and legally compliant operations.

Regulation is a law enacted by a governmental body granting a regulatory agency enforcement authority. While “government regulation” refers to the law, “regulate” means controlling or supervising using rules and regulations. Government regulations provide guidance that helps businesses succeed, and failure to comply often coincides with various business failures.

CONSEQUENCES OF POOR REGULATORY COMPLIANCE FOR ORGANISATIONS
Organisations that fail to meet regulatory compliance requirements might face substantial fines or penalties that depend on the exact nature of the offence. Other consequences of poor regulatory compliance for organisations include:
• Suspension or debarment from bidding on government contracts.
• Damage to the organisation’s reputation as a trustworthy business partner.
• Individual penalties or jail time for individuals who intentionally violate the law. and
• Disruption to business operations caused by investigations or legal proceedings.

IMPORTANCE OF REGULATORY COMPLIANCE
The importance of regulatory compliance for organisations includes financial health, protection from lawsuits, business continuity and competitiveness, maintaining a good reputation, protection from cybercrime, and improved profitability.

See the full video on Regulatory Risk and Regulatory Risk Management: https://youtu.be/z3NiHsdNACA